CRISIL Research has announced that it has assigned a CRISIL IER fundamental grade of 4/5 (pronounced ‘four on five’) to SKS Microfinance (SKS). This grade indicates that the company’s fundamentals are `superior’ relative to other listed equity securities in India.
CRISIL has further stated that the fair value of the stock is Rs 310 per share. At the current market price of Rs 270 per share, a valuation grade of 4/5 indicates that the market price has upside from the current levels. The grades assigned by CRISIL are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor.
The assigned fundamental grade reflects the improved growth prospects of the microfinance industry post the Reserve Bank of India’s (RBI’s) intervention, significant entry barriers for new players, healthy growth opportunity for SKS and the company’s strong management. The grade draws support from the RBI’s intent to regulate the microfinance sector and NBFC-MFIs (MFIs regulated by the RBI as NBFCs) and introduction of its regulations, which have helped the industry to recover post the Andhra Pradesh (AP) crisis. In 2010, the state government of AP passed an ordinance that nearly crippled the industry.
CRISIL has also stated that RBI’s regulations also act as a significant deterrent against possible state interventions in the future. In the backdrop of the RBI’s intervention, the company not only survived the crisis but also witnessed significant improvement in its business fundamentals. During FY12-14, SKS’ disbursements grew at a CAGR of 32% and cost to income declined from 155% to 75% (61% in Q1FY15). In contrast, other large AP-focused MFIs continue to be under corporate debt restructuring (CDR).
Given the RBI’s regulation that only two MFIs can lend to a borrower, the entry barrier works in SKS’s favour as it has a wider presence across India with a well-established infrastructure. The company has operations in more than 15 states and is the second largest player with a market share of 13% in India, excluding AP. It is believed that there is an estimated demand of Rs 2.4-2.5 trillion for micro-credit in India and SKS is best placed to tap the market given its national presence and significant availability of funds – it recently raised Rs 4 billionn through QIP.
However, the grade is restricted because of lower scale of operations vis-à-vis other listed NBFCs, reflected in smaller assets under management (AUM) and SKS’ presence in a single asset class. Despite sufficient risk- mitigating factors in the microfinance business, CRISIL believe that the risk of state intervention continues to exist. The passage of the MFI Bill is a key monitorable as it will further reduce the chances of intervention in the business of registered MFI players.
SKS Microfinance Financial outlook
CRISIL Research expects assests under management(AUM) and disbursements to grow at a two-year CAGR of 39% and 35% to Rs 60 billionn and Rs 87 billionn by FY16 respectively. Net interest income is estimated to grow to Rs 5.8 billion in FY16 because of decline in cost of funds. Cost of borrowing is expected to decline from 13.5% in FY14 to 12.8% in FY16.
Cost to income is expected to improve from 75% in FY14 to 56% in FY16 driven by the company’s consistent cost rationalisation. We expect PAT to grow from Rs 699 mn in FY14 to Rs 2.5 bn in FY16. Leverage has declined to 1.9x in Q1FY15 because of the recent QIP and is expected to increase to 2.2x in FY15 and 2.4x in FY16.
CRISIL Research has used a one-year forward P/B multiple of 3.1x to arrive at a fair value of Rs 310 per share for
SKS. At the current market price of Rs 270, the valuation grade is 4/5.